Money, Banks and Finance in Economic Thought

A tradition of conceptual confusion in the history of international trade theory

Gelbhaar Christoph, Universität Mannheim

It is hardly a controversial statement that economists have long been exaggerating the degree to which the mere grasp of the concept of comparative advantage has been enabling them to explain the patterns of international trade. But what has been the precise nature of this exaggeration? Paul Krugman sees it as a story of omission. In his account, economists had always understood that their models of comparative advantage were not capturing all the causal determinants at work. They had always been aware of the importance of increasing returns to scale, in particular. But since, for a long time, they had not been able to model this other influence on trade patterns, they had simply been omitting it in their textbooks. They had only included what they had been able to model, and that was comparative advantage trade. This account has two implications: Firstly, the exaggeration appears to be a phenomenon of the past that has been overcome, that has been eliminated by the new models of ‘non-comparative advantage trade’ that Krugman and other authors of the ‘New Trade Theory’ put forward in the second half of the 20th century. Secondly, both the exaggeration and its supposed end appear to be historical products of the same progress of scientific knowledge. In this account, international trade theory has followed “the line of least mathematical resistance,” progressing naturally from the simpler models of comparative advantage to the New Trade Theory after the latter had been made possible by new models of ‘imperfect competition.’ My paper challenges this account. Instead, it argues that the exaggeration should be seen as the often welcome product of a tradition of conceptual confusion. This different account has two implications, again: Neither has the exaggeration been overcome and eliminated from modern textbooks, nor can its history be explained as a by-product of analytical progress. For a conceptual confusion is something that always could have been eliminated, no matter what the state of mathematical modelling was.

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Keywords: International trade; comparative advantage; David Ricardo; Paul Krugman

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